The equity markets bounced back yesterday as the House of Representatives passed a historic tax bill, inching closer to a legislative tax overhaul centered on President Trump’s electoral promise. With corporate taxes likely to come down from 35% to 20%, expectations of higher corporate earnings and dividend payouts are likely to drive stocks.
As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they could benefit from ‘cash cow’ stocks that garner higher returns.
However, singling out cash-rich stocks alone does not make for a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.
ROE: A Key Metric
ROE = Net Income/Shareholders’ Equity
ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company. In other words, this financial metric enables investors to identify stocks that diligently deploy cash for higher returns.
Moreover, ROE is often used to compare the profitability of a company with other firms in the industry – the higher, the better. It measures how well a company is multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.
In order to shortlist stocks that are cash rich with high ROE, we have added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. In addition, we have taken a few other criteria into consideration to arrive at a winning strategy.
Price/Cash Flow less than X-Industry: This metric measures how much investors pay for one dollar of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow generating stock.
Return on Assets (ROA) greater than X-Industry: This metric determines how much profit a company earns for every dollar of asset, which includes cash, accounts receivable, property, equipment, inventory and furniture. The higher the ROA, the better it is for the company.
5-Year EPS Historical Growth greater than X-Industry: This criterion indicates that continued earnings momentum has translated into solid cash strength.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Here are five of the 15 stocks that qualified the screen:
Monsanto Company MON: Missouri-based Monsanto is a leading global provider of agricultural products. The company has a stellar trailing four-quarter average positive earnings surprise of 244.8% and long-term earnings growth expectation of 12.1%. Monsanto carries a Zacks Rank #2.
CBRE Group, Inc. CBG: Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe. The company has a trailing four-quarter average positive earnings surprise of 22.3% and long-term earnings growth expectation of 13%. CBRE Group carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Microchip Technology Incorporated MCHP: Incorporated in Delaware in 1989, Microchip develops and manufacturers microcontrollers, memory and analog and interface products for embedded control systems, which are small, low-power computers designed to perform specific tasks. The company has a Zacks Rank #2. Microchip has a trailing four-quarter average positive earnings surprise of 9.3% and long-term earnings growth expectation of 12.2%.
Applied Materials, Inc. AMAT: Headquartered in Santa Clara, CA, Applied Materials offers manufacturing equipment, services and software to the semiconductor, display, and related industries worldwide. This Zacks Rank #2 company has a trailing four-quarter average positive earnings surprise of 2.7% and long-term earnings growth projection of 17.1%.
Celanese Corporation CE: Texas-based Celanese is a global hybrid chemical company with diverse products that rank either first or second in their respective markets, based on market share. This Zacks Rank #2 company has a trailing four-quarter average positive earnings surprise of 2.5% and long-term earnings growth projection of 9%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Celanese Corporation (CE) : Free Stock Analysis Report
CBRE Group, Inc. (CBG) : Free Stock Analysis Report
Microchip Technology Incorporated (MCHP) : Free Stock Analysis Report
Applied Materials, Inc. (AMAT) : Free Stock Analysis Report
Monsanto Company (MON) : Free Stock Analysis Report
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